{{$store.state.data.search.serverData.config.placeholder}}

{{ vm.heading }}

{{ vm.closeTabLabel }}

Notice of updates
!

Since the last time you logged in our privacy statement has been updated. We want to ensure that you are kept up to date with any changes and as such would ask that you take a moment to review the changes. You will not continue to receive KPMG subscriptions until you accept the changes.

Hi
!

Our privacy policy has been updated since the last time you logged in

We want to make sure you're kept up to date. Please take a moment to review these changes. You will not receive KPMG subscription messages until you agree to the new policy.

Peer analysis: Predicting supervisory challenges

Peer analysis: Predicting supervisory challenges

Related content

The banking industry faces challenging times. It is a mature industry vulnerable to newer, sometimes unregulated entrants eager to take profitable segments of business. Simultaneously, the industry is more closely regulated than previously and the costs of being a bank are escalating. Considering these factors combined with a low interest rate environment and challenging economic environments, it is plain to see that the banking sector is clearly an industry under pressure that is being forced to innovate.

One of the innovations made by the Single Supervisory Mechanism (SSM) is greater use of peer comparisons as a supervisory tool. This is driven by the ECB’s goal of ensuring a harmonized supervisory approach across Europe and facilitating the availability of data on larger numbers of banks to make this level of peer comparisons possible. Peer analysis makes for an excellent supervisory tool, and where the same or similar data is available to banks, it can also help banks to understand their place in the market and for preparing for conversations with their supervisor.

In January 2016, the European Central Bank (ECB) set out five high-level supervisory priorities for the year. In this report, we examine how banks in the five largest peer groups against these supervisory priorities using KPMG Peer Bank. The peer groups in the KPMG Peer Bank are based on the size of banks and their business model – similar to the ECB’s methodology for assigning peer groupings. Using these peer groups, we identified a few key metrics that reflect the supervisory priorities and consider which supervisory insights arise.

We consider three key areas in this report: profitability, non-performing loans (NPLs), and capital adequacy:

Profitability of banks is a concern. Credit institutions must continually prove to the ECB that their business model is sustainable and can withstand cyclical developments and structural changes. Our analysis demonstrates that many banks have work to do in order to meet the ECB’s metrics in this area.

Despite some deleveraging within the industry, the ECB acknowledges that NPLs are perhaps the most significant risk facing the banking sector in Europe. Our analysis showed that three of the five peer groups have average NPL levels above 10%. The ECB has publicly mentioned that 12% NPLs are a trigger point for more intensive supervision of a bank’s NPLs.

Related to the issue of capital adequacy, we look at the CET1 ratios of the peer groups and we also look at the percentage of total credit risk exposure accounted for by IRB models. The analysis indicated that the recent regulatory push to increase the level of high quality capital at banks has been successful, although the higher capital levels have also increased the cost base of the bank.Peer group analysis offers identifiable supervisory signals. Moreover, it is more interesting, and even more valuable to banks, when done on an individual bank basis. Where a bank finds itself as an outlier in a particular area, it should be ready to explain to the ECB why it is an outlier relative to its peers. Likewise, on a sector level, a bank should be able to justify why certain business model types may be showing more or less strength compared to other peer groups.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.